Puerto Rico to default on loan payment today
Puerto Rico's fiscal woes are getting worse. Governor Alejandro Garcia Padilla announced that the U.S. terriroty would not pay the $422-million interest payment due today, leading to a sovereign default and potentially blowing up the municipal bond market.
Governor Alejandro Garcia Padilla invoked a debt moratorium law approved last month, saying during a televised address Sunday that the commonwealth needs to focus on providing essential services. The bank, already operating under an emergency period, had until the end of Monday to make the payment. The Government Development Bank reached a tentative framework agreement with investors who hold $900 million of its debt late Sunday under which creditors would accept a potential haircut, leaving them 47 cents on the dollar of the face value of their original securities, the bank said in a statement. The parties agreed to keep discussions out of court while they negotiate.
“Faced with the inability to meet the demands of our creditors and the needs of our people, I had to make a choice,” Garcia Padilla said during his 10-minute speech. “I decided that essential services for the 3.5 million American citizens in Puerto Rico came first.”
GDB’s missed payment may open the door to larger and more consequential defaults on general-obligation bonds, which are protected by the island’s constitution. Puerto Rico and its agencies owe $2 billion on July 1, including $805 million for general obligations. It also could imperil slow-moving efforts by U.S. lawmakers to resolve the biggest crisis ever in the tax-exempt, municipal bond market.
Puerto Rico officials have been negotiating with creditors to defer payments. No matter which route Puerto Rico took, credit-rating companies saw a default as inevitable. Moody’s Investors Service analysts said last week that any non-payment, even if creditors agree to it, constitutes a default in their eyes. S&P Global Ratings said a distressed debt exchange or temporarily withholding interest is synonymous to default.
The tentative accord with investors holding $900 million of debt involves bondholders swapping their securities in the near term at a 56.25 percent recovery rate, the bank said in a statement. If Puerto Rico at a later date reduces most of its debts through a broader restructuring, then the final recovery rate on GDB bonds would be 47 percent of the original value. The GDB will pay May 1 interest on the bonds in full.
Are there options short of a Washington bailout? Of course there are. The investor "haircut" could extend beyond the $900 million in loans to include other debt instruments. But there are billions of dollars in general obligation bonds that are constitutionally guaranteed. A big default in July on payments of those bonds is expected.
But the federal bailout would be the simplest and least painful measure for the Puerto Rican people. The measure before Congress now is being called a "restructuring" of debt in order to avoid the word "bailout" being used. The effect is the same. A federal oversight board would be named that would negotiate with creditors and force fiscal reforms on the island's government.
How did they get in this mess?
Puerto Rico racked up $70 billion of debt across more than a dozen issuers as it borrowed to paper over budget deficits. Garcia Padilla said 10 months ago that the obligations were unpayable. Yet, up until now, the commonwealth only missed $143 million of payments on appropriation bonds from the Public Finance Corp. and rum-tax securities from the Infrastructure Financing Authority.
With 45% of the population living in poverty and residents fleeing the island for the U.S. mainland in record numbers, Puerto Rico's future is not a bright one. Getting the territory's fiscal house in order is going to take time, and it won't happen without pain.